India: Acquisition Transactions And The Limits Of Labour Laws In India

Global investors with aggressive expansion plans often
acquire businesses in the host country or buy out units of existing
entities which fit in with their strategic ambitions. Such cross
border transactions are being increasingly undertaken in India as
foreign direct investment is freed from almost all limits, and
investors are drawn to India by the availability of skilled low
cost resources, and to enter an emerging market with growing demand
for goods and services. Among the key issues which an investing
company is confronted with, is the tangle of labour and employment
laws in India which govern employee rights. Provisions for
termination of employment are contained in the Industrial Disputes
Act, Shops & Establishment Act of the State in which the
establishment is located, Standing Orders Act, and the Service
Contracts of employees.

Labour laws referred to above contain restrictions on transfer
of employees, redeployment, redesigning employee roles and
responsibilities, recalibrating head count numbers and costs. In
short, restructuring which involves merger of one unit with another
where the original unit loses its identity or becomes part of
another entity, or one unit acquires another but the existing unit
retains its status as an entity, are all events which lead to
change of owner for the employees, or reallocating (transfer)
employees between the existing and acquired units, or termination
of employment contract, and designing settlement packages, or even
re-writing employment agreements within the permissible limits
under the local laws.

Divestment of a Unit or Undertaking.

This is a situation in which a running business undertaking is
acquired by another company and the ownership of the business
changes from the old company to a new company. This may entail
simply a sale of assets and purchase by a new company with or
without the employees (assuming these to be "workman") of
the transferred undertaking. Where such workmen are not taken over
by the new buyer, the old company may continue their service
contracts but any redeployment of roles and terms would require
consent to be obtained in terms of the ID Act, notices to be given
regarding changes in their terms, etc. On the other hand, if the
workmen are transferred to the buyer entity, this involves a change
of ownership and a new employer for such workers. As judicial norms
go, the Supreme Court in India has held that the old employer has
to obtain the consent of the affected workers even if there is no
change in their terms of service and they are transferred on no
less favourable terms.

More significantly, the employee transfer would have to be
accompanied by an agreement between the transferor (seller) and the
transferee (buyer) under which the seniority or period of service
may have to be taken over by the buyer so that there is no
interruption of employment for purpose of social security benefits.
This will also involve transfer of gratuity funds to the buyer
entity and transfer of provident fund accounts of the employees to
the new entity.

If the workers do not wish to move over, and the existing
employer does not wish to retain them then the workers have to be
"retrenched" as redundant under the ID Act and have to be
paid compensation, given notice of termination with reason recorded
therein, and all their termination benefits have to be paid under
appropriate settlement agreements.

There may also be a situation where the transfer of undertaking
may involve transfer of workmen on terms less favourable. In this
case the workmen who agree to resign from the old employer
(seller), and accept to move to the new employer (buyer), would
have to be paid retrenchment compensation as provided under the ID
Act, and if they have done five years of continuous employment in
the seller company, they would have to be paid their gratuity
benefits, though the provident fund accounts and balances would
have to be transferred to the new employer (buyer). Here a note of
caution needs to be sounded for the benefit of the buyer/new
employer, as the courts have held that the doctrine of continuing
employer mandates that the new employer must take over the service
seniority of the employees. Thus, new employers must undertake due
diligence to ensure that the appropriate deductions of statutory
contributions were made by the old employer and only then take over
the accounts. In most cases of mergers (involving sale or transfer
of shares), the courts now insist that the buyer would incur the
social security obligations as a successor employer.

Determination of the status of employees

Before the separations or transfers as discussed above are
carried out or negotiated, it is absolutely necessary to determine
the exact status of an employee and whether he/she is a
"workman" in terms of the law. There are a number of
statutory and judicially defined criteria that have to be applied
to the employment agreements or appointment letters to determine
the exact status in each case. Further the procedures are also
provided for in these statutes. Both the ID Act and the S & E
Act of the State concerned provide for notices, grounds of
termination simpliciter where permitted, though in most cases only
'with cause' termination are permitted. Then, depending
upon the industry and strength of the total numbers employed, there
are legal requirements of giving simple notice to the government or
applying for prior permission to the government in case of large
undertakings in certain industrial establishments. Under the ID
Act, the procedure to be followed depends on a case to case fact
situation of the industry, whether it is in the service sector or
in the manufacturing sector.

Where the employees are external resources or
"consultants" who were hired for providing services as
independent contractors, the procedural requirements and legal
conditions for termination are different from those mandated for
"workmen". If these resources have to be terminated as
surplus or redundant, their settlement packages, and payment of
statutory benefits, if applicable, hinge on the determination of
their status.

Redeployment of resources

Acquisitions or mergers also entail redeployment of resources or
redesigning of roles. This could involve playing with job titles,
descriptions and duties, and service conditions. Often, transfers
and relocations may also look inevitable given the need to support
some functions and reduce head count in other service verticals.
Here again some of the considerations and issues which must be
examined prior to implementation are discussed below:-

I. The employees who fall in the category of "workmen"
may pose a stickier challenge as the requirements provided for in
the legislation would have to be examined and complied with before
any program for redesigning or change in terms of service can be
implemented. Under the ID Act, the conditions of service of any
workman, particularly of any matter specified in the Fourth
Schedule, shall not be changed without giving a notice to the
workmen likely to be affected by such change. The purpose of this
requirement is essentially to ensure that the concerned workmen are
notified of the proposed change and if they object to the notice
for change, then the employers have to either obtain their consent
or negotiate a way out of the workmen's opposition. Schedule
Four contains matters like wages, (reduction of wages would be a
bone of contention), contribution paid by the employer to their
provident fund or pension fund under any law, compensatory and
other allowances, hours of work, leave with wages and holidays,
withdrawal of any customary concession or privilege, introduction
of new rules of discipline, or alteration of existing rules, etc.
The courts in India have ruled that these service conditions cannot
be changed without the consent of the affected worker. If the two
sides do not agree on a way out, then litigation proceedings can be
long and contentious.

II. Consultants and independent contractors or service providers
may have to be moved around with reference to their contracts and
terms of engagement. Managerial or supervisory employees who may
not be "workmen", may be a simpler category of resources
to redesign, depending on the type of employment contract, its
duration, and provisions for termination or renewal. However, even
under the law of contract in India, the employer may be required to
seek the consent of the affected employee, and may have to consider
renegotiation during term, with consent, or where possible look at
termination clauses and even voluntary exit provisions in the
contract. Providing reasonable settlement packages and statutory
benefits as per the law also facilitate exits and separation.

III. The intention behind the Notice prescribed under Section
9-A appears to be that the "workman", if aggrieved by the
proposed change, are provided an opportunity to raise an Industrial
Dispute and approach the appropriate forum/ labour authorities, so
that the dispute may be made a reference by the appropriate
government (State government) if the "workman" and the
employer fail to arrive at an amicable settlement. Section 9A is
designed to protect the interests of the "workman". Where
a reference is made at the instance of the employer pursuant to an
industrial dispute arising out of a Notice under Section 9A to the
detriment of the "workman", the burden to justify the
change lies on the employer. The Supreme Court has observed that a
benefit prevailing for long, making it a condition of service,
should not be allowed to be interfered with lightly to the
prejudice of the workmen in the absence of compelling material. At
a practical level, employers may follow the requirements of the
Proviso to Section 9A, with a view to securing a settlement with
the affected workmen, or the concerned employees, so that they
voluntarily agree and subscribe to the proposed changes.

Alternative Strategy

Given that termination of employment poses a host of legal
challenges, it is better sometimes to consider softer options like
negotiating voluntary exits (instead of terminations), or gradual
separation of smaller numbers of employees rather than executing
bulk discharge of employees. This option is preferable to more
drastic measures but also requires careful drafting of settlement
agreements and termination letters which must work around the
delicate issue of grounds of removal such that employees are not
left feeling aggrieved that the terms of their employment were
violated or they were treated unfairly. Separation agreements are
more often a work of art than a legal challenge and require
adroitly worded documents to protect interests of both the
parties.

Conclusion

The complexity of the terrain described above, though daunting,
does not mean that the law does not permit restructuring of
businesses or optimum employee arrangements, but these have to be
devised or worked around given the protection of employee rights
under the law.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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